Reunited, but at great cost: Germany's economy is showing some signs of life, but unemployment still threatens recovery, particularly among the newly privatised companies. Peter Torday reports

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The Independent Online
FAINT they may be, but there are signs that the German economy is coming to life. Export orders, likely to be the main force behind recovery, are rising. And the latest business survey by the Ifo, a German economics institute, suggests industry is growing more optimistic.

But no one is yet foolhardy enough to declare the recession finally over.

'Exports are up because of trade outside Europe,' says Axel Nitschke, economist at Deutscher Industrie-und Handelstag, the German chambers of commerce. 'But that is only 30 per cent of the total and it is not enough to offset weak home demand.'

Gustav-Adolf Horn, a senior economist at the Berlin-based economics institute, Deutsches Institut Fur Wirtschaftforschung, is even more pessimistic, warning of the risk of a double dip back into recession this year.

'There will be no early recovery. Private consumption might fall more than expected because real wages are falling, and that will devastate investment and push up unemployment. The budget deficit is steady and there is no extra support from government. And investors will delay investment until interest rates have fallen further.'

Indeed the verdict - possibly overly pessimistic - of some commentators is that there will be no growth in western Germany this year. True, pan-German growth will be 1 per cent or more, but that is due to rapid expansion in the east, which is in turn based on DM150bn ( pounds 61.48bn) annual public transfer payments from its wealthy sibling. But on this view it will be 1995 before the recovery becomes decisive.

Germany's biggest problems are almost all traceable to the enormous costs of reunification. The eastern lander account for just 9 per cent of total pan-German output but the area's 16 million inhabitants make up a fifth of the population.

As a result, consumption in the east runs at twice production and it may be as much as 15 years before the two come into line.

For the forseeable future therefore, the west faces annual transfers of around DM150bn to subsidise the unemployment benefit, social security, training, wage and investment subsidies and other federal programmes to bridge the gap.

As a result, last year the total public sector deficit - the federal deficit, borrowing by the lander and public corporations such as the post office - totalled DM225bn.

Many observers doubt whether the federal government will stick to its goal of holding down the federal deficit to DM70bn. Public tolerance of even higher taxes to finance unification has, as the current election campaign amply demonstrates, reached breaking point.

Yet there is little chance that the DM150bn in annual transfers from west to east will diminish before the end of the millennium.

All this leaves the German financial community deeply uneasy. It would like to see the government cut public spending but accepts that the burden of financing the east must go on for years. Equally, it worries that tax increases have reached a political limit, especially in an election year.

So there is considerably more caution in Germany than London about the speed and extent of further cuts in short-term interest rates.

Nor is the inflation outlook as serene as London thinks. True, real wages are falling. But a big question mark hangs over the explosive growth of broad money supply.

Though the latest surge is convincingly explained away as being for technical reasons, German analysts point out that the Bundesbank has overshot its monetary target for several years - perhaps storing up inflation pressures for the future.

Upward pressure on prices is also likely to stem from the government resorting to indirect taxes and user fees for the foreseeable future.

But perhaps the main threat to long-term recovery is unemployment. Official figures put the pan- German total at 4 million, or about 10 per cent of the labour force according to the OECD, but the real figure may be more like 6 million.

The authorities have tackled the jobless crisis in several ways. They have put hundreds of thousands to work clearing up pollution and dismantling old industrial plants.

Further large numbers are enrolled in retraining programmes. But eventually these will run out and nobody expects these people to find alternative employment.

Rupert Schroter, of the Ministry of Labour for the eastern state of Brandenberg, is pessimistic. One programme in which people over 55 are put on a pre-retirement plan at 65 per cent of former income was devised to train them for a future job. But it trains people in public or social work for which there are no jobs. 'This is a generation without any chance at all, no matter what skills they have,' he says.

But there are worries that even when recession is over, employment will shrink further as investors in the east trim the bloated work forces of the newly privatised companies and in the west industry is forced to strive ever harder to compete.

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